In a recent private letter ruling (PLR) 201452016, the IRS determined that the conversion of two corporate subsidiaries into disregarded entities qualifies as distributions in complete liquidation under Section 332. Generally, two Internal Revenue Code (IRC) sections govern corporate liquidations: Section 331, which requires gain or loss to be recognized; and Section 332, which does not result in recognition of gain or loss. A corporation, which is not an eligible entity, will often convert to a limited liability company (LLC) in order to “check-the-box” and be treated as disregarded.332 provides tax-free treatment to the corporate shareholder’s gain or loss from the receipt of the subsidiary’s property in liquidation, and Sec. 337, the term “80% distributee” means only the corporation that meets the 80% stock ownership requirements of Sec. Thus, the subsidiary’s gain or loss is eligible for nonrecognition only to the extent that property is distributed to a direct 80% corporate shareholder, even in a consolidated return context. Thus, gain or loss would be recognized on property distributed to a minority shareholder of a subsidiary corporation even if Sec. As a consequence of these provisions, a liquidation of a corporate subsidiary might permit the members of the group to avail themselves of Sec. Outside the consolidated return area, the application of Sec. In contrast, within a consolidated group, two or more members may receive assets of the subsidiary on a tax-free basis under Sec.
There must also be some distribution with respect to the stock of the subsidiary.
If a liquidation does not qualify under Section 332, Section 331 will generally govern and gain or loss will be recognized.
The Portfolio highlights traps for unwary taxpayers and discusses planning opportunities in connection with a corporate liquidation.
Final regulations effective January 15, 2008 (TD 9376), explain how the members of a consolidated group succeed to tax items, or “attributes,” of a subsidiary corporation when two or more members of the group own stock in the subsidiary and the subsidiary is liquidated on a tax-free basis.
1504(a)(2) (generally 80% by voting power and value) and the distribution was made in complete cancellation or redemption of all the stock of the liquidating corporation. 1.1502-34 permits shares of stock owned by two or more members of the group to be aggregated in order to determine whether the required stock ownership threshold has been satisfied. 332 stock ownership requirement, as well as other provisions of the Code not relevant to this discussion. 337(a) generally provides that the liquidating corporation does not recognize gain or loss on the distribution to the 80% distributee of any property in a complete liquidation to which Sec. For example, assume that 80% of a subsidiary’s ( would be required to recognize gain or loss on the distribution of all its assets to both shareholders. 332 liquidation, the parent corporation succeeds to and takes into account 22 specific tax attributes as set forth in Sec. These attributes include earnings and profits (E&P), net operating loss (NOL) carryovers, capital loss carryovers, unused tax credits, methods of depreciating assets, and other methods of accounting, including income that has been received by an accrual-method taxpayer for goods and subscriptions but not earned, and thus deferred under Secs. The Service issued proposed regulations in February 2005 that applied the single-entity principles of taxation for allocating the intercompany items of a liquidating subsidiary where multiple members acquire the assets of a liquidating subsidiary in a complete liquidation to which Sec. The proposed regulations allocated the items of the liquidating corporation to the various distributee members in a manner such that these items could be used to offset the income or tax liability of the group or to each distributee member to the extent that such items would have been reflected in investment adjustments to the stock of the liquidating corporation owned by such distributee member under Regs. Because of the perceived lack of clarity in the proposed regulations, and based on comments received by the IRS, the final regulations made certain revisions to the proposed regulations. The final regulations provide rules for succession to the following attributes: The E&P of the subsidiary is allocated proportionately to the distributee members based on the relative FMV of the liquidating corporation’s stock owned by each such member.